Turnaround Strategies and Performance of Kenya...
Transcript of Turnaround Strategies and Performance of Kenya...
The University Journal Volume 1 Issue 2 2018 ISSN: 2519-0997 (Print)
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Turnaround Strategies and Performance of Kenya Airways
Bibiana W. Mungai1 and Hannah Orwa Bula2 1Department of Human Resource Management, Kenyatta University, Nairobi, Kenya; Email:
[email protected] 2Department of Human Resource Management, Kenyatta University, Nairobi, Kenya; Email:
Abstract
Many organizations across the globe today are facing declining performance at some point in
their cycles due to internal and external factors or changes in the business environment. Most
often, the organizations enter the state of decline due to pressures emanating from these factors
which threaten their existence. These organizations compete for survival in the volatile and
hostile market environment (the red ocean) and in order to emerge successful during the times of
distress, most of them adopt turnaround strategies to enable them return back to their normal
profitability as well as improve their performance. As an alternative response to the crisis,
turnaround strategies are applied to enhance an organization’s chances of survival and achieve
sustainable performance and recovery. This paper is an initiative into a study that sought to
determine the effect of turnaround strategies on performance of Kenya Airways. Specifically, the
study sought to establish the effects of revenue generating strategy, cost reduction strategy, asset
reduction strategy and financial restructuring on performance of Kenya Airways. The study
adopted a descriptive research design where data was analysed using descriptive statistics.
Findings revealed that the four strategies affected the performance of Kenya Airways positively
and contributed a lot to its turnaround.
Keywords: Turnaround, Turnaround Strategy, Revenue Generation Strategy, Cost Reduction
Strategy, Financial Restructuring Strategy, Organizational Performance,
Restructuring
Introduction
A turnaround situation occurs when a firm experiencing downturn attempts to recover from
the declining performance so as to achieve a stable level of performance. It is also a situation
where the management tries to manage and stabilize the underperforming or distressed
company with an overall aim of returning the company to normalcy. The end result is to
bring the company back to its feet in terms of profitability, solvency, liquidity as well as cash
flow.
Robinson (1992) defined a turnaround situation as representing absolute and relative -to-
industry declining performance of sufficient magnitude to warrant explicit turnaround
actions. A firm is said to be in decline when it experiences a resource loss sufficient to
compromise its viability (Cameron et al., 1987). The process of turnaround begins after
recognition of the need to reverse the adverse effects of environmental pressures or internal
weaknesses.
Cite: Mungai, B. W., & Bula, H. O. (2018). Turnaround Strategies and Performance of
Kenya Airways. The University Journal, 1(2), 1-16.
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According to Boyne and Richard (2006), there are three major turnaround management
strategies abbreviated by 3Rs: Retrenchment, Repositioning, and Reorganization. According
to Newton (2009), the strategies focus on revenue increases, cost reduction, asset reduction
and redeployment as well as competitive repositioning or a combination of the strategies.
Revenue increasing strategies focus on existing product lines which may be supplemented by
products that have been temporarily discontinued provided the product can be reintroduced
quickly and deemed profitable. The cost reduction strategies are adopted by firms that are
close to their current breakeven point with high fixed costs, high labour costs or limited
financial resource. The cost reduction strategies usually produce results more quickly than
revenue or assets reduction strategies. Assets reduction or redeployment strategies are applied
if current sales are less than a third of breakeven sales where decision must be made as to
which assets to sell and which to keep. A balance between other strategies such as revenue
increases, cost reduction and asset reduction may be achieved as strategies are pursued
simultaneously.
Statement of the Problem
Correct identification of decline in organizational performance is a precondition of initiating
turnaround. Acknowledging the root cause of a decline is crucial for a company’s recovery.
The turnaround recovery can be achieved through turnaround strategy which involves
retrenchment and recovery strategic activities.
Kenya Airways also known as the national carrier was founded in 1977 after the breakup of
the East African Community which caused the demise of East African Airways. It has been a
member of the African Airline Association back from 1977 and also a full member of Sky
Team since June 2010. It is a public-private enterprise between large stakeholders including
the government owning up to 29.8% and KLM (Koninklijke Luchtvaart Maatschappij) Royal
Dutch Airlines, owning 26.73%. The rest of the shares are held by private owners. The airline
just like many other organizations has been facing a decline in performance as a result of
significant losses from the year 2014/2015 which was attributed to various factors including;
foreign exchange losses, interest on loans, volatility of fuel prices and maintenance costs of
its fleet among others (KQ, 2015).
The airline has since been operating in the red ocean with losses amounting to millions part
of which is associated with the political instability across the globe that negatively impacted
on the tourism market. Weak economies and stiff competition in international markets arising
from regional conflict and competitive challenges lower the break-even load factors as the
fields are a little higher than average (KQ, 2016). Further losses were attributed to volatility
of exchange rates especially the weakening of Kenya shilling against the US dollar leading to
foreign exchange losses, threat of terrorism and epidemic which adversely impacted global
travel, as well as stringent international regulatory environment where travel advisories were
issued by various countries like Britain and the US who contribute a lot to the revenue of the
Company (KQ, 2015).
The cost-effective models and wider range of destinations offered by European, American
and Asian airlines covering almost all of Africa in a bid to boost International trade with
Africa, posed a most significant threat to KQ as it reworked its expansion strategy and sought
to increase volumes seeking to cover its growing operational and financial costs. The airlines
had also purchased several new aircrafts, but as a result of reduction in passengers, capacity
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as well as revenues was reduced. More so, the company had invested in a number of hedges
against fluctuations in the price of crude oil, which have seen the carrier lose $56million due
to paying high fuel costs even after recent drop in fuel prices. KQ was also faced with high
financial costs and loan re-evaluation losses. As a result, the airline posted a net loss of
KSh.11.9 billion ($107.2 million) for the half year ending September 2015 up from the
KSh.10.45 billion loss it reported during a similar period in the previous year and KSh.26.2
billion net loss for the year ended March 2016 as compared to KSh.25.7 billion previous year
(KQ, 2015).
It is for this reason that the airline decided to undertake a turnaround strategy through the
help of an external agency McKinsey in order to help it put an end to the loss making it had
been grappling with over time as well as propel the airline back to profitability. The strategies
were geared towards cost reduction and revenue generation in order to reduce the
performance gap and return the airline to profitability (KQ , 2015/2016).This study therefore
is aimed at establishing the effects of turnaround and performance of Kenya Airways.
Literature Review
This section covers three theories which highlight the relationship between turnaround
strategies and organizational performance. The strategic turnaround theory which advocates
for the strategic and operating turnarounds; five forces theory that emphasizes more on the
forces present in the competitive business environment which determine the intensity of
competition affects the performance of an organization and the resource based theory which
focuses more on the resources available for the organization and how they affect their
behavior. The empirical review of the variables is also highlighted.
Theoretical Review
Strategic Turnaround Theory
The theory of strategic turnaround emphasizes on two types of turnaround strategies i.e.
strategic and operating strategies. According to Hofer (1980), the operating turnaround are
actions for firms suffering from inefficiency or threat of bankruptcy while the strategic
turnaround actions applies to firms suffering from improper market alignment. The strategic
turnaround choices take into consideration new ways to compete in the existing markets or
entering new markets. Operating turnaround strategies on the other hand aim at coping with
economic recession through cost cutbacks, increasing or generating revenues, reducing assets
or a combination of the approaches as indicated in his classical framework for turnaround.
Hofer (1980) further argues that the strategies reflect a different degree of severity of
operating situation and the strategy involves cutbacks in discretionary expenses. It is
employed by firms that operate below break-even point and need to increase their
profitability. Asset reduction involves disposal of assets especially the fixed assets and is a
last result solution for firms that operate far below break-even point. This reduces the level of
fixed costs and help in reducing total costs of the firm. Revenue enhancement is applied
when a firm is operating substantially, but not extremely below break-even level which helps
in generating extra revenue. If a firm is operating closer but below break-even levels, it calls
for the application of a combination of strategies. Under this method, all the three that is, cost
reduction, revenue generation and asset reduction actions, are pursued simultaneously in an
integrated and balanced manner and, has favorable impact on cash flows and profits. Porter
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(1980) further advises that operating turnaround strategies should be applied in early stages
of turnaround through asset and cost reduction and revenue generating which aim to a firm’s
immediate recovery as well as end of threat facing the firm.
Five Forces Theory
The five forces theory emphasizes on the five competitive forces that shape every industry
and market. The forces include the new potential entrants, the power of suppliers and the
power of buyers, threat of substitute, and the intensive competitive rivalry in the industry.
The forces determine the intensity of competition hence attractiveness in an industry structure
and performance as well as profitability which in turn prevents corporate decline. The model
analyses the driving forces in an industry and allows organizations to access current strength
in their competitive position and strength of the position they are planning to attain. This
helps an organization to take advantage of its strengths and improve on its weaknesses so as
to compete efficiently (Porter, 1980).
This theory emphasizes on the five forces model in the airline industry in Kenya, where
notably, various forces have greatly affected the industry resulting to the corporate decline
especially in the case of Kenya Airways. The industry has been affected by a host of external
factors which include; high operating costs, high fuel prices, declining passenger traffic,
landing and maintenance costs, intense competition from low cost carriers which has led to a
great war in pricing thereby leading to corporate decline of Kenya airways (KQ, 2016).
Resource Dependency Theory
The resource dependency theory (RDT) focuses more on organization’s resources and how
they affect its behavior. The procurement of external resources is essential for both strategic
and tactical levels of management in an organization as they depend wholly on resources
which originate from the environment. According to Barney (1991), resource-based theory
implies that the possession of strategic resources provides an organization with a golden
opportunity to develop competitive advantages over its rivals. These competitive advantages
in turn help the organization enjoy strong profits, over time. The tangibility of a firm’s
resources is important consideration within resource-based theory. The tangible resources can
be readily seen, touched, and quantified, such as physical assets, property, plant, equipment,
and cash. In contrast, intangible resources are resources that are difficult to see, touch, or
quantify, such as the knowledge and skills of employees, a firm’s reputation, and a firm’s
culture. The intangible resources are more likely to meet the criteria for strategic resources
(i.e., valuable, rare, difficult to imitate, and non-substitutable) than are tangible resources.
Executives who wish to achieve long-term competitive advantages should place a premium
on trying to nurture and develop their firms’ intangible resources (Barney, 1991). To
accomplish turnaround, there is need for adequate resources which in turn give the
organization a competitive advantage over its rivals, bearing in mind resources are scarce and
competition is high.
Empirical Review
Various studies have been undertaken regarding turnaround strategies in failing organizations
but due to rapid changes in the environment, it begs for defined strategies by managers,
where earlier studies have therefore not exhausted this area. A study by Maheshwari (2003),
which investigated turnaround challenges and how they impact on performance, found out
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that the choices available for turnaround were leadership change, asset and people
retrenchment, technology upgrading, cost reduction as well as Human Resource
interventions. The results further concluded that the implementation of turnaround strategies
led to improved organizational performance.
Although the problem of performance decline applies in all industries and sectors of the
economy across the globe, it has been viewed and tackled differently in different industries,
and countries with varied responses. Thus, as observed, there is limited literature on
turnaround strategies and performance of Kenya Airways hence this study sought to fill the
existing gap by establishing how the turnaround strategies influenced the performance of
Kenya Airways.
Revenue Generation Strategy and Organizational Performance
According to Ritchie and Campiranon (2014), revenue generating strategy enables a
company to reach a break-even volume as quickly as possible. It attempts to increase sales by
combination of price strategy, increased advertisements and promotions, increased sales
forces, added customer services, product re-introductions or change in product portfolio and
market share. Other activities considered under revenue generation include; improvement in
capacity usage and production process, strict inventory controls, decreasing debt turnover,
increasing accounts receivable turnover rate and stock turnover rate. As noted by Thompson,
Strickerland and Gamble (2007), revenue generating strategies are at ends and these ends
concern the purpose and objectives of the organization. They provide a direction and scope of
an organization in order to achieve a long term advantage. Revenue generation strategy
applies when the business does not have enough idle capacity to allow major asset disposal or
when it is not close enough to break even to prosper by cutting costs, i.e. if the sales of the
firm are below break-even point; 30-50%, the business must make concerted effort to
increase its volume.
In the Kenyan airline industry for example, the government has major influence in revenue
generation through regulations, tax policies as well as business policy. Kenya Airways is also
trying to generate more revenue through the sale and subleasing of its aircrafts which will
also help in reducing its fleet. The airline is also refocusing on its market and has recently
introduced new routes e.g. the Cape Town route geared towards its regional growth and sold
out its morning London slot a move geared towards revenue generation.
Cost Cutting/Reduction Strategy and Organizational Performance
Cost reduction or cutting involves cutbacks through reducing maintenance costs, eliminating
shrinkages in supply usage, leasing tools and machinery, reducing expenses in Reaserch and
Development (R&D) and marketing, and other seemingly discretionary expenses (Flouris &
Oswald, 2012). The strategy is often used when a worthwhile business goes into crisis where
the management first determines the root of the problem. Across the globe, the cost of
production, fuel, raw materials and human resources is rising each year prompting
organizations to apply cost reduction strategies in order to survive in difficult times especially
in the recent economic down turn. Organizations are unable to retain their workforce hence
laying off staff through their own cost reduction programs becomes an option.
According to Hofer (1980) and Robbins and Pearce (1992), companies under severe financial
distress need to make aggressive cost and asset reductions in order to survive. Slashing labor
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costs, production costs, selling and administrative expenses, R&D expenditure, and financing
costs is a common strategy used in the early stages of corporate turnarounds (Denis & Kruse,
2000; Beixin & Gibbs, 2008). However, as pointed out by Slater (2001), the aggressive
reduction of costs and assets is no easy task because of the possible organizational resistance
to such action. Asset-reduction strategies have been recommended for failing companies in
order to improve cash inflows. This would help in meeting the immediate cash obligations as
well as for creating more productive assets. KQ for example applied this strategy of
restructuring in order to cut the unnecessary costs leading to the decline of the airline.
Asset Reduction/Divestment Strategy and Organizational Performance
Asset reduction strategy involves disposal of assets primarily fixed assets. According to
Hirriyapi (2010), asset restructuring refers to the sale and disposing off or shedding business
units or product divisions on segments of business operations to reinvest the resources for
other production and potential business process. The logic with an asset retrenchment
strategy is that by reducing underperforming assets, a firm can halt its downward slide and
hopefully improve performance (DeWitt, 1993; Hoskisson & Johnson, 1992). If the strategic
factor market for a given industry is perfectly competitive, the cost of a resource will
approximate its economic value. For example, Kenya Airways sold parts of its Boeing
aircrafts among other assets in an effort geared towards asset reduction.
Financial Restructuring and Organizational Performance
According to Schmuck (2012) financial restructuring involves equity issues, changes in
dividend policy and debt restructuring i.e. change in debt to asset ratios over the restructuring
process. It is the reworking of a firm’s capital structure to relieve the strain of interest and
debt payments and may be separated as equity based or debt based strategies. Equity based
strategies cover dividend cuts or omissions and equity issues; i.e. rights issue, public offer or
institutional placing. Firms in financial distress tend to reduce or omit dividends due to
liquidity constraints; restrictions imposed by debt covenants or strategic considerations such
improving firms bargaining position with trade unions. The firms may also raise equity funds
via share issues more than non-distressed with the security of their lending, for example the
Kenya Airways’ bailout by the government injection of KSh. 4.2 billion into the company in
form of a bridging loan to enable it navigate from the strong operational debts. Kenya
Airways applied this strategy to restructure its balance sheet in order to develop capital
structure to support its operations.
Methodology
In this paper, descriptive research design which is a scientific design where information is
collected without changing the environment, influencing or manipulating it in any way, to
gain more information about variables within a particular field of study in order to provide a
picture of a situation as it naturally exist (Burns &Grove, 2007) was employed. The design
was chosen as it is able to give accurate data and provide a clear picture of the phenomenon
under study minimizing biasness and maximizing on reliability of evidence collected. It was
appropriate for the study as an accurate and authentic description was required in establishing
the effect of turnaround strategies and performance of Kenya Airways.
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Stratified random sampling was used where the population was divided into strata comprising
the stakeholders and the levels of management of the airline. According to Kothari (2004),
stratified random sampling involves selecting respondents using well defined strata. Simple
random sampling was further applied to select individual’s sub-samples from each stratum.
Each stratum contributed a sample number which was proportional to its size in the
population. Therefore, a sample of 48 respondents, representing the three cadres of the
population was used for the study.
Both primary data by help of self-administered questionnaire as well as secondary data
through scrutiny of the organization’s strategic plan, annual reports, investor’s briefs,
financial statements, marketing plan, the organization’s website and other publications was
collected. The collected data was then analyzed using both quantitative and qualitative
methods. The findings were descriptively presented in tables, and for further analysis and to
facilitate comparison, the authors used inferential statistics inform of regression analysis to
measure the degree of relationship between independent variables and dependent variable
which carried the following model of regression (Y=β0+β1X1+β2X2+β3X3+β4X4).
Findings and Discussion
Revenue Generation Strategy and Performance of Kenya Airways
On whether revenue generating strategy influenced performance of Kenya Airways, the
respondent’s findings were as follows:
Table 1: Revenue Generation Strategies and Performance of Kenya Airways
Statement Greatly Moderate Not at all Mean SD
Sale of asset like land and aircraft to raise
revenue growth significantly 43.9% 36.6% 19.5%
1.8 0.8
Enhanced incentives to the airline agents
and customers as well as loyalty program,
and firming up ticket sales deals with big
clients to increase bookings as well as
revenue 58.5% 29.3% 12.2%
1.5 0.7
Expansion of regional market as well as
increased frequencies to key regional
routes to build strong growth in regional
demand 56.1% 24.4% 19.5%
1.6 0.8
Identification of strategic partnership for
code sharing on strategic routes 65.9% 12.2% 22.0%
1.6 0.8
Identification of more competitive
products 58.5% 29.3%
12.2%
1.5 0.7
Average 1.6 0.7
Source: Field Data (2017)
Regarding sale of asset like land and aircraft and how this could raise revenue growth
significantly, 43.9% of the respondents indicated greatly, 36.6% indicate moderate while
19.5% indicated not at all. Regarding the statement enhancing incentives to the airline agents
and customers as well as loyalty program, and firming up ticket sales deals with big clients
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to increase bookings as well as revenue, majority of the respondents 58.5% indicated greatly,
29.3% indicated moderate while 12.2% indicated not at all.
Further, on expansion of regional market as well as increased frequencies to key regional
routes to build strong growth in regional demand, results of the study indicated that 56.1%
said greatly, 24.4% moderate and 19.5% not at all. Further, on identification of strategic
partnership for code sharing on strategic routes, majority of the respondents 65.9% indicated
greatly, 12.2% indicated moderate while 22% indicated not at all. Finally, the respondents
were asked to respond on the statement identification of more competitive products, majority
of who 58.5% indicated greatly, 29.3% moderate while 12.2% indicated not at all. The
studies agreed with that of Ritchie and Campiranon (2014), that revenue generating strategy
enable a company to reach a break-even volume as quickly as possible. It attempts to increase
sales by combination of price strategy, increased advertisements and promotions, increased
sales forces, added customer services, product re-introductions or change in product portfolio
and market share. On a three point scale, the average mean of the responses was 1.6 which
means that majority of the respondents were agreeing to the statements in the questionnaire.
The standard deviation was 0.8 meaning that the responses were clustered around the mean
response.
Cost Reductions Strategy and Performance of Kenya Airways
On the effects of cost reductions strategies on performance of Kenya Airways, the
respondents’ findings were as follows:
Table 2: Cost Reductions Strategies and Performance of Kenya Airways
Statement Greatly Moderate Not at all Mean SD
Reduction of operating costs as a
result of restructuring 48.8% 29.3% 22.0%
1.7 0.8
Reduction of the airline fleet to cut
down on cost 41.5% 36.6% 22.0%
1.8 0.8
Renegotiation of the airline contracts 46.3% 34.1% 19.5% 1.7 0.8
Reduction of ground handling costs by
renegotiating its ground handling and
security contracts for its stations 53.7% 26.8% 19.5%
1.7 0.8
Introduction of on-time performance
aircraft turnaround times and asset
utilization 48.8% 31.7% 19.5%
1.7 0.8
The overhead and fuel costs has
reduced 46.3% 39.0% 14.6%
1.7 0.7
Joint procurement and sharing
services waste especially in catering 56.1% 24.4% 19.5%
1.6 0.8
Average 1.7 0.8
Source: Field Data (2017)
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Regarding reduction of operating costs as a result of restructuring, 48.8% of the respondents
indicated greatly, 29.3% indicate moderate while 22% indicated not at all. Regarding the
statement reduction of the airline fleet to cut down on cost, majority of the respondents
41.5% indicated greatly, 26.6% indicated moderate while 22% indicated not at all. Further,
on the statement renegotiation of the airline contracts, results of the study indicated that
46.3% said greatly, 34.1% moderate and 19.5% not at all. Further, on reduction of ground
handling costs by renegotiating its ground handling and security contracts for its stations,
majority of the respondents 53.7% indicated greatly, 26.8% indicated moderate while 19.5%
indicated not at all. On introduction of on-time performance aircraft turnaround times and
asset utilization, majority of the respondents 48.8% indicated greatly, 31.7% indicated
moderate while 19.5% indicated not at all. Regarding the statement, that overhead and fuel
costs has reduced majority of the respondents 46.3% indicated greatly, 39% indicated
moderate while 14.6% indicated not at all. On joint procurement and sharing services waste
especially in catering, majority of the respondents 56.1% indicated greatly, 24.4% moderate
while 19.5% indicated not at all.
On a three point scale, the average mean of the responses was 1.7 which means that majority
of the respondents were agreeing to the statements in the questionnaire. The standard
deviation was 0.8 meaning that the responses were clustered around the mean response.
The results agree with multiple researchers in the field of turnaround management who
emphasize on the importance of cost retrenchment for achieving turnaround success (Hofer,
1980; Bibeault, 1999; Robbins& Pearce, 1992). Further, Newton (2009), stresses that
managerial restructuring is employed not only to cut costs but also to rationalize staff. In
most turnarounds, top management generally is replaced with outsiders rather than insiders.
Asset Reduction Strategies and Performance of Kenya Airways
On the effects of asset reduction strategies on performance of Kenya Airways, the findings
were as follows:
Table 3: Asset Reduction Strategies and Performance of Kenya Airways
Statement Greatly Moderate
Not at
all Mean SD
Divestment of non-core assets by the
airline 41.5% 41.5% 17.1%
1.8 0.7
Discontinuing unpromising services
and products including routes 53.7% 36.6% 9.8%
1.6 0.7
Sale and sub-lease of aircrafts to
rationalize it excess capacity as well as
increase aircraft utilization 41.5% 31.7% 26.8%
1.9 0.8
Average 1.7 0.7
Source: Field Data (2017)
On divestment of non-core assets by the airline, 41.5% of the respondents indicated greatly,
41.5% indicate moderate while 17.1% indicated not at all. Regarding the statement
discontinuing unpromising services and products including routes 53.7% indicated greatly,
36.6% indicated moderate while 9.8% indicated not at all. Finally, the respondents were
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asked to respond on the statement sale and sub-lease of aircrafts to rationalize its excess
capacity as well as increase aircraft utilization, 41.5% of the respondents indicated greatly,
31.7% moderate while 26.8% indicated not at all.
On a three point scale, the average mean of the responses was 1.7 which means that majority
of the respondents were agreeing to the statements in the questionnaire. The standard
deviation was 0.7 meaning that the responses were clustered around the mean response. The
results thus agreed with Shleifer and Vishny (1992) that firms operating in industries that
have declined and have low levels of liquidity improve their state through divesting or
discontinuing their non-core assets thus raising their liquidity levels. This is achieved when
the firms offer a significant discount to sell assets quickly so that they can raise revenues to
sustain the firm as well as do away with unnecessary or idle assets.
Financial Restructuring and Performance of Kenya Airways
On the effects of financial restructuring on performance of Kenya Airways the findings were
as shown in Table 4.
Table 4: Financial Restructuring and Performance of Kenya Airways
Statement Greatly Moderate Not at all Mean SD
Increase in the airline turnover as a
result of financial restructuring 53.7% 31.7% 14.6%
1.6 0.7
Increase in operating profit due to
financial restructuring 41.5% 31.7% 26.8%
1.9 0.8
Renegotiation of the airline debt to
decrease interest rates on short term
loans 56.1% 26.8% 17.1%
1.6 0.8
There has been reduction of bills
receivable and inventory 46.3% 36.6% 17.1%
1.7 0.7
The airline has put in place cash and
budgetary control systems 41.5% 34.1% 24.4%
1.8 0.8
Adaption of capital raising from the
airline shareholders including the
government 43.9% 41.5% 14.6%
1.7 0.7
Reduction in debt ratio 41.5% 41.5% 17.1% 1.8 0.7
Average 1.7 0.8
Source: Field Data (2017)
With regard to increase in the airline turnover as a result of financial restructuring, 53.7% of
the respondents indicated greatly, 31.7% indicate moderate while 14.6% indicated not at all.
Regarding the increase in operating profit due to financial restructuring, 41.5% indicated
greatly, 31.7% indicated moderate while 26.8% indicated not at all. On renegotiation of the
airline debt to decrease interest rates on short term loans, results of the study indicated that
56.1% said greatly, 26.8% moderate and 17.1% not at all. Further, on the statement, there has
been reduction of bills receivable and inventory, 46.3% of the respondents indicated greatly,
36.6% indicated moderate while 17.1% indicated not at all.
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Further, on the statement the airline has put in place cash and budgetary control systems,
majority of the respondents 41.5% indicated greatly, 34.1% indicated moderate while 24.4%
indicated not at all. Regarding the statement, adaption of capital raising from the airline
shareholders including the government 43.9% indicated greatly, 41.5% indicated moderate
while 14.6% indicated not at all. Finally, the respondents were asked to respond on the
statement reduction in debt ratio, 41.5% of the respondents indicated greatly, 41.5%
moderate while 17.1% indicated not at all.
On a three point scale, the average mean of the responses was 1.7 which means that majority
of the respondents were agreeing to the statements in the questionnaire. The standard
deviation was 0.8 meaning that the responses were clustered around the mean response.
The results agree with Schmuck (2012) on financial restructuring where equity issues,
changes in dividend policy and debt restructuring i.e. change in debt to assets ratios over the
restructuring process should be adopted when a firm is undertaking financial restructuring.
This involves the reworking of a firm’s capital structure to relieve the strain of interest and
debt payments identified as equity based or debt based strategies.
Regression Analysis
Table 5: Model Summary
Model R R Square Adjusted R
Square
Std. Error of
the Estimate
1 .921a .745 .838 .495
a. Predictors: (Constant), Revenue generation strategies, cost reduction strategies, asset
reduction strategies and financial restructuring
Source: Field Data (2017)
The above model showing the coefficient of determination, explains the extent to which
changes in dependent variable is brought out by change in independent variable which can
also be explained as the percentage in the variation. All the four independent variables (cost
reduction, financial restructuring, asset reduction, and revenue generation) explain the
variation. From the four independent variables studied, there was 74.5% of variance in
organizational performance represented by R2. In this case, other factors not studied
contributed 25.5% of variance in the dependent variable. This therefore shows that a further
research should be conducted to investigate the influence of turnaround strategies on the
organizational performance of the airline.
Table 6: Analysis of Variance (ANOVA) a
Model Sum of Squares df Mean square F Sig.
1 Regression 25.483 4 6.371 14.866 .003b
Residual 15.856 37 .429
Total 41.340 41 a. Predictors: (Constant), Revenue generation strategies, cost reduction strategies, asset
reduction strategies and financial restructuring
b. Dependent Variable: Organizational Performance
Source: Field Data (2017)
Turnaround Strategies & Performance of Kenya Airways [Mungai, B. W. & Bula H. O.]
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The F critical at 5% level of significance was 3.44. Since F calculated is greater than the F
critical (value=14.9), it shows that the overall model was significant. The significance, 0.003
is less than 0.05, indicating that the predictor variables, (revenue generation, cost reduction,
asset reduction and financial restructuring) explain the variation of the dependent variable
which is organizational performance. The F critical at 5% level of significance was 25.48.
Conversely, since the significance value of F (14.866) was larger than F critical, at 5% level
of significance, this shows that the overall model was significant.
Table 7: Multiple Regression Analysis
Model Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
B Std. Error Beta
1 (Constant) 3.767 .585 4.727 .000
Revenue generation 1.315 .154 .110 .749 0.032
Cost reduction 1.580 .150 .273 1.895 0.015
Asset reduction 0.510 .153 1.393 2.683 0.049
Financial restructuring 1.402 .142 1.105 .716 0.023
Source: Field Data (2017)
From the regression analysis, the substitution of the equation is (Y= β0 + β1X1 + β2X2 +
β3X3 + β4X4), Y=3.767+1.315X1+1.580X2+0.510X3+1.402X4). Where, Y is the dependent
variable i.e. organizational performance, X1 Revenue generation strategy, X2 Cost reduction
strategy, X3 Asset reduction strategy and X4 Financial restructuring. When all the four factors
are held constant, the performance of Kenya Airways was 3.767. The findings indicated that
any increase in revenue generation led to 1.315 increase in the performance of KQ. A unit
increase in cost reduction lead to 1.580 increase in performance of KQ. Increase in asset
reduction and financial restructuring, lead to a 0.510 and 1.402 increase in performance
respectively. This is consistent with the theoretical arguments and past empirical research on
asset retrenchment where firms experiencing financial downturn employ asset retrenchment
and divestment, which in turn leads to improved performance in the process as the
underperforming assets are reduced leading the firm to focus on those assets it can utilize
effectively (Hambrick & Schecter, 1983; Robbins & Pearce, 1992).
At 5% level of significance and 95% level of confidence, revenue generation had 0.032 level
of significance, cost reduction 0.015, asset reduction 0.049 and financial restructuring had
0.023 level of significance. This implies that the most significant factor was cost reduction
strategy which had a great impact on the performance of the airline followed by financial
restructuring, revenue generation and asset reduction. When all factors were held constant, an
increase in cost reduction strategy led to 0.015 increase in performance of KQ, an increase in
financial restructuring, led to 0.023 increase in performance, an increase in revenue
generation led to 0.032 increase in performance while a reduction/restructuring of
unprofitable asset, led to 0.049 increase in performance of the airline.
The findings generated from the study compares well with the empirical literature which
indicated that turnaround strategies influences organizational performance positively as all
the strategies employed, had a positive impact on performance of Kenya Airways in one way
or another. As outlined in the empirical review, the turnaround strategies are generated
towards increasing revenue, reducing cost, assets reduction or retrenchment in order to
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reinvest the resources for other production and potential business process as well as financial
restructuring which are all geared towards improving the performance and productivity of an
organization. All the strategies adopted by KQ had a positive impact on its performance as
per the regression analysis.
Implications to Research and Practice
The study findings presented in this paper would be of much benefit to the stakeholders,
management of Kenya Airways as well as the airline industry in Kenya in understanding the
effective turnaround strategies available to boost their performance as well as counter the
poor performance bearing in mind the global competitiveness. The study would also benefit
key policy makers in the airline industry in Kenya by providing information on the concept of
turnaround strategies as well as theoretical framework on turnaround, which will in turn help
them in dealing with non performing businesses and preventing corporate decline, as well as
place the necessary systems to curb it. Also, the study results will be of value to scholars and
other researchers as it will provide relevant literature as well as basis for future research on
turnaround management. The students and academics will use the study as a reference and
basis for discussion on turnaround strategies.
Conclusions The conclusions drawn here were informed by the study findings in relation to the findings of
other similar studies. On the influence of revenue generating strategies on performance of
Kenya Airways, the study concluded that revenue generating strategies influenced
performance of Kenya Airways by increasing sales through a combination of price strategy,
increased advertisements and promotions, increased sales forces, added customer services,
product re-introductions or change in product portfolio and market share. Other activities
considered under revenue generation which led to increased revenue and sales volume
included improvement in capacity usage and production process as well as strict inventory
controls. Second, cost reductions strategies were found to affect performance of Kenya
Airways. More so, it was concluded that asset reduction strategies affected performance of
Kenya Airways. This involved disposal of assets primarily fixed assets. Finally, financial
restructuring was also found to have an effect on performance of Kenya Airways. This
involved reworking of the airline capital structure to relieve the strain of interest and debt
payments based on two strategies i.e. equity and debt based strategies.
Recommendations
Organizations facing declining performances, should apply turnaround strategies especially
cost reduction and financial restructuring, in order to improve their performance.
Kenya Airways on the other hand needed to finalize the implementation of the turnaround
strategies in order to achieve its full results and benefits, so as to return to operational
profitability and curb the decline.
The management of the airline should fully support the strategy and fully operationalize the
turnaround plan in response to the changes in the environment with the involvement of all
key stakeholders to ensure inclusion as well as support of the strategy. This will also ensure a
successful turnaround of the airline and will be achieved through teamwork as well as by
providing a conducive working environment.
Turnaround Strategies & Performance of Kenya Airways [Mungai, B. W. & Bula H. O.]
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The study also recommended that KQ adopts better cost reductions strategies, to ensure that
unnecessary costs within the company are reduced and to guarantee the company an
improved performance.
The government on the other hand should increase the bailout of the airline as its one of the
key stakeholders in order to facilitate the implementation of the strategies as well as improve
its performance.
Further, the study recommended that, the management should focus much on creating a blue
ocean out of the red ocean of its core framework, so as to strengthen the airline against its
competitors instead of benchmarking which will help to reduce competition as well as a
repeat of the situation given the competitive volatile (red ocean) environment it is operating
in. The company must also put in mind changes in technology which might hinder the
implementation of the same as well as affect its future operationalization, as well as invest
more on research on the lessons and challenges of implementing turnaround strategies in the
airline industry.
Recommendation for Further Research
Arising from the findings and discussion, it is observed that the implementation of the
turnaround is still ongoing, thus a further research should be conducted to establish the end
results of the same. A further research can also be conducted on how financial restructuring
in relation to employee restructuring affects the image of an organization during turnaround
especially in the case of KQ. A comparative study can be carried out on factors influencing
the outcome of turnaround strategies adopted by reviving firms in different airline industries.
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